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Title: Optimal Monetary and Fiscal Policy in an Economy with Inflation Persistence

Author(s): Paul Luk and David Vines

Publication Date: May 2015

Keyword(s): fiscal policy, monetary policy, New Keynesian model and Phillips curve

Programme Area(s): International Macroeconomics

Abstract: This paper studies a simple New-Keynesian model of fiscal and monetary policy coordination when the policymaker acts under commitment. With a New Keynesian Phillips curve it is optimal to control inflation only through the use of monetary policy. But, when price-setters use a Steinsson (2003) Phillips curve, fiscal policy plays an active role, enabling a greater degree of consumption smoothing.

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Bibliographic Reference

Luk, P and Vines, D. 2015. 'Optimal Monetary and Fiscal Policy in an Economy with Inflation Persistence'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10586